Monthly Archives: August 2016

Dividends To Be Cut: Will Stocks Crash?

Oil stocks can’t sustain their dividends and will need to cut them. Oil needs to be at $60 a barrel to break even, plus more to pay a dividend out of profits. Oil has been in stuck in the mid-$40s range recently. Currently many former bond investors have moved into dividend paying stocks in the hopes of getting a bond-like yield. My concern is that if stocks encounter turbulence and especially if dividends are cut, then these yielded hungry investors may revolt and dump their stocks thus triggering a stock market sell off. Recently news stories have surfaced that the combined cash used to pay dividends and do corporate buy backs of stocks exceeds the cash earned by companies and

August 31st, 2016|mayflowercapital blog|Comments Off on Dividends To Be Cut: Will Stocks Crash?

Bond Investing: Solving Two Problems During The Next Big Crash

Bond investors want to know when will the great 35 year bond bull market end. People who use traditional economic metrics to estimate this may find their instruments need recalibrating because the massive overhang of excessive global debt since 1997 is unprecedented. Thus traditional metrics before 20 years ago may make the economy to seem more likely it actually is to trigger inflation and growth. Because consumers and governments all over the world have too much debt they are constrained from spending or borrowing more and thus are stuck in a debt/deflation trap with no known solution. Also, people are used to being inspired by claims that debt fueled stimulus in China, Japan, and the EU will somehow make the

August 30th, 2016|mayflowercapital blog|Comments Off on Bond Investing: Solving Two Problems During The Next Big Crash

No Way To Refute Bearish Points

One of the most shocking economic statistics are the ones showing the difference between the claim that the economy is in full employment mode even though the hidden unemployed are several percentage points higher than the official U-3 unemployment rate of 4.9%. For a while I didn’t let that be a significant concern because I felt perhaps some of the hard core unemployed were so unskilled and deserving of only a minimum wage job that their absence from the economy wouldn’t have made that much of a difference. But reading David Rosenberg say that the Employment to Population ratio is at a level consistent with 8% jobless instead of 5% I felt perhaps this topic needed to more closely reviewed

August 29th, 2016|mayflowercapital blog|Comments Off on No Way To Refute Bearish Points

Rates Went Up When Yellen Spoke: What Will Happen To Rates?

The ten year Treasury yield went up from 1.57% to 1.63% today because of Yellen’s speech at the Fed’s annual meeting at Jackson Hole, Wyoming. Assuming that the U.S. economy was (hypothetically) firewalled from foreign influence then perhaps short term Fed funds rates should be at 1.5%, assuming the price of money should mostly reflect compensation for inflation. People have gotten used to high rates as the correct standard after living through the high inflation era of the 1970’s, followed by high rates for another decade in the 1980’s to wring out inflation, (even in the 1990’s rates were often over 5% for the Lehman Agg index). Thus it is logical that people’s emotions should cause them to feel that

August 26th, 2016|mayflowercapital blog|Comments Off on Rates Went Up When Yellen Spoke: What Will Happen To Rates?

When Will Negative Rates End?

The maddening descent into global negative rates seems like it will never end as central banks continue to double down on their mistakes. Factors that will lead to its end are the growing problems that banks and insurance companies are experiencing as a result of negative or zero rates. These industries have a “must have” need for normal rates so that they can operate. If an extreme form of negative rates is implemented they will be unable to function. Then ironically the Federal Reserve will have to bail them out as they did for Bear, Stearns and AIG in 2008. This would result in voter anger at favoritism for rich banks, like what happened in 2008 with the TARP bailout

August 24th, 2016|mayflowercapital blog|Comments Off on When Will Negative Rates End?

When Will Negative Rates End?

Economists may be coming around to admitting QE and negative rates don’t work in a year or so. However, what happens to academic ideas is that when a particular school of thought is discredited their developers dig their heels in and don’t want to admit they are wrong. Thus central banks may try more of these dangerous placebos for a few more years. Investors should not count on the Fed admitting they were wrong and backing off from their misbehavior of QE and moving toward ultra-low rates. I believe the stock bubble has gotten so bad the Fed is trying to scare investors with threats of a rate increase but it will either not happen or it will be a

August 22nd, 2016|mayflowercapital blog|Comments Off on When Will Negative Rates End?

Interest Rates Are The Lowest Ever In 5,000 Years

Is the headline true? Not really. The economics authors who write these articles are comparing ancient loan rates to today’s short term Treasury rates in major countries. In a medieval environment someone might borrow two bags of rice and pay them back with three bags a year later, thus incurring a 50% interest rate. This is not the same as making a deposit of cash at a bank! There is also a difference in modern times between a very poor borrower with bad credit (or even good credit) who takes a cash advance on a credit card and pays 25% note rate and two points and then pays it off in a month. Then the points fee, when annualized, makes

August 19th, 2016|mayflowercapital blog|Comments Off on Interest Rates Are The Lowest Ever In 5,000 Years

Should Investors Have a Very High Allocation to Stocks?

There is an idea floating around in the investment world that one can take on a very high amount of risk in equities because (allegedly) stocks always go back up a few years after a crash so all a retiree needs to do is to have enough cash to go several years without selling their stocks to pay for living expenses. Thus, allegedly, a wealthy retiree with $10million can have an equity allocation of 80% or 90%, instead of only 30%. Traditional financial planning theory is that one should allocate bond ownership in proportion to one’s age. For example, a 30 year old should have 30% in bonds, 70% in stocks and a 65 year old should have 65% in

August 17th, 2016|mayflowercapital blog|Comments Off on Should Investors Have a Very High Allocation to Stocks?

CPI Data Shows Low Inflation

The CPI was released today by the BLS. Core rate inflation (which excludes food and energy costs) had a 0.1% increase for last month or about 1.2% annualized. But the core rate, less rent, including owner’s equivalent rent (which is weighted at 33% of expenditures and had a 0.3% price increase last month) would be zero. The rent component of the CPI is misleading because only a third of the population are renters and they tend to have less purchasing power and less ability to qualify for a loan. The ability to get and use a loan is what increases the money supply and creates inflation. Thus the renters’ travails may not translate into inflation if they can’t respond by

August 16th, 2016|mayflowercapital blog|Comments Off on CPI Data Shows Low Inflation

New Administration Likely to Raise Taxes

It seems highly likely that the November election has already been decided. The new administration will seek to raise taxes. If the Senate and the House of Representatives are controlled by the Democrats then taxes will rise. Typically the ideal time to raise taxes is right after an election. The economy has been growing at only 1% and capex expenditures have been growing at only half the rate of the typical recovery. Thus even a small tax increase could result in a recession. Recessions cause investors to flee stocks and move into bonds. Countering this tendency will be the fact that Democrats prefer more fiscal stimulus than Republicans, so that could act to offset some of the recessionary impact of

August 15th, 2016|mayflowercapital blog|Comments Off on New Administration Likely to Raise Taxes